The Risks of Pulling Out of a Nonprofit Merger

Nonprofits face unique hurdles when merging organizations with different programs, donor bases and organizational philosophies. Unlike a for-profit company, there aren't outstanding shares of stock that an acquiring company can simply buy to force the issue. The boards of directors of the merging nonprofits must agree on every material matter. The negotiations often take months, and because there isn't an ownership interest being acquired, there isn't really a point of no return when the merger is officially consummated. Nonprofits sign agreements, but if one party wants to pull out of the merger, there is nothing to prohibit it from doing so as long as the organization hasn't been dissolved. However, the intangible risks to the organization and its managers in pulling out of a merger after a certain point can be significant.

  1. Image

    • A nonprofit must maintain a positive image to attract donors and program participants. Pulling out of a planned merger supports the perception that either management is not able to work collaboratively or the organization is in such dire shape that consolidation is not feasible. A nonprofit's reputation drives its ability to further its mission. The risk of damaging its standing with important interest groups means a nonprofit must think carefully before entering merger talks at all, because it can't afford to have the negotiations fail.

    Confidence

    • Pulling out of a failed nonprofit merger risks undermining confidence in the nonprofit's managers. One of the features of a nonprofit organization is that it is owned by the public, not individual shareholders. Ultimately, this means that managers, such as the executive director, and members of the board are always at risk of being replaced if their effectiveness is called into question. Merger negotiations are expensive and time-consuming. Deciding against the deal after the wheels are in motion can be viewed as ineffective leadership, initiating a loss of confidence from which management may never recover.

    Persistent Problems

    • Perhaps the biggest risk of pulling out of a nonprofit merger is leaving the problems that caused the organization to consider merger in the first place unaddressed. Organizations tend to consider mergers for good reasons that often go to the ability of an organization to remain in existence. By the time a nonprofit considers a merger, the need for solutions to problems is often at a crisis stage. Pulling out of one deal might mean that there isn't enough time to negotiate a new deal with another partner before something catastrophic happens.

    Deterrance

    • Nonprofits face unique problems that stem from their position as public charities. Access to resources and cash flow can change due to factors that the organization cannot control, while the demand for services continues to grow. There is an effective window of opportunity where a merger can work to alleviate these problems, but if an organization waits too long, its liabilities may become so insurmountable that no other organization wants to take them on in partnership. There is a significant risk that in pulling out of a merger deal, a nonprofit might find that its window of opportunity has closed and its position and reputation for pulling out of deals makes it impossible to find another suitor.

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